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The Supreme Court on April 2 declared the RBI circular of February 12, 2018, as “ ultravires , Section 35AA of the Banking Regulation Act”.
The RBI circular directed all banks to identify borrowers having fund-based and/or non-fund based exposure of ₹5 crore or above and to report, in case of even “one day default” by any of the borrowers, to the Central Repository of Information on Large Credits (CRILC). And, a time-bound resolution plan (RP) had to be implemented for all such default accounts.
If an RP in respect of large accounts with aggregate exposure of ₹2,000 crore or above (on or after March 1, 2018) is not fully implemented within 180 days, the lenders were directed to file insolvency application severally or jointly under the Insolvency and Bankruptcy Code (IBC) within 15 days from the expiry of the timeline.
The above guidelines, through the February 12 circular, were issued in exercise of power conferred under Sections 35A, 35AA (read with S.O.143(E) dated May 5, 2017, issued by Government of India) and Section 45L of the Reserve Bank of India Act, 1934.
The Supreme Court has observed that “Section-35AA makes it clear that the Central Government may, by order, authorise RBI to issue directions to any banking company or banking companies when it comes to initiating the insolvency resolution process under the provisions of the Insolvency Code. The first thing to be noted is that without such authorisation, the RBI would have no such power.”
The emerging scenario
The clarification of the Supreme Court may have far-reaching consequences:
All actions taken up to now by the banks under the circular, being faulted at the very inception, will stand unravelled.
Wherever the lender(s) had approached NCLT in pursuance to the RBI circular, such cases will stand vacated/dismissed or will have to be withdrawn.
Banks severally or jointly will be free take a call on whether to invoke insolvency proceedings in IBC on a case-to-case basis in terms of provisions of Insolvency and Bankruptcy Code.
The RBI will have to carefully examine each specific case of default in case of each specific borrower before issuance of any direction to banks/lenders to invoke insolvency proceedings.
The Central Government authorisation will be required to be sought by the RBI, in terms of Section-35AA, in each specific case of default of a specific borrower. The general authorisation by Central Government is not contemplated by Section -35AA.
A still serious question may also arise as to legal validity of the list of top 12 defaulter companies issued by the RBI on June 13, 2017, with a direction to banks for immediate reference to IBC.
These directions were issued after Section-35AA came into force and the test laid down by the Supreme Court order dated April 2 of a “specific debtor” with a “specific default” is binding in nature. The RBI and lenders concerned need to examine as to whether specific issues in respect of specific default of specific debtor were examined by RBI before issuing a direction to lenders to invoke IBC, and whether specific authorisation order was issued by Central Government in these specific cases of “a default”.
The legal validity of the insolvency process so far in all these cases otherwise will be subject to legal scrutiny in terms of the order of the Supreme Court in the case of Dharani Sugar and Chemicals Ltd vs Union of India and others as per their order dated April 2, 2019. The same will hold true for the second list and other cases mandated to lenders by the RBI.
The apex court ruling has opened the floodgates for a number of petitions before the High Court(s)/NCLT/NCLAT to review specific cases, in the light of the SC ruling declaring any generic direction under Section-35AA as invalid.
The Central Government, the RBI and the lenders also need to act swiftly, so that the insolvency process in terms of IBC does not come to a halt — in the absence of specific direction based on specific authorisation orders in deserving cases. It would also require a quick but in-depth examination of a potential revival of a defaulting company.
Where management change has taken place or in the process of taking place, close legal and equitable examination would be needed to provide justice to all stakeholders.
The writer is Chairman, INMACS
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